Inflation is starting to decline, according to US Federal Reserve Chairman Jerome Powell, but he expects it to take time. In addition, he warned that if the economic data are uncooperative, interest rates may increase more than expected.

“The disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,” the central bank chief said during an event in Washington, D.C. “But it has a long way to go. These are the very early stages.”

Powell participated in a question-and-answer session with David Rubenstein, co-founder of the Carlyle Group, at the Economic Club of Washington, D.C. Powell was a partner at the company previously.

Investors are hoping that the Fed will soon end the aggressive interest rate hikes it started last year, which is why markets briefly turned positive as Powell spoke. The major averages eventually turned positive again, but Powell later issued a warning about the importance of strong economic data, such as the jobs report for January released last week.

When asked if having the jobs report before the policy meeting would have affected the Fed’s rate decision, Powell responded, “Unfortunately, we don’t get to play it that way.” According to the report, nonfarm payrolls increased by 517,000 in January, almost triple the Wall Street estimate.

Inflation running hotter than the Fed anticipates, he said, would result in higher rates.

“The reality is we’re going to react to the data,” Powell said. “So if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do more and raise rates more than is priced in.”

The Federal Reserve increased its benchmark interest rate at its most recent meeting, which ended six days ago, by a quarter percentage point, the eighth increase since March 2022, to a target range of 4.5%-4.75%.

He said in his remarks on Tuesday that the Fed probably won’t feel comfortable with inflation until 2024, but he gave no indication of when the hikes will end. By many measures, inflation is currently running well above the central bank’s target rate of 2%.

“We expect 2023 to be a year of significant declines in inflation. It’s actually our job to make sure that that’s the case,” he said. “My guess is it will take certainly into not just this year, but next year to get down close to 2%.”

When examining inflation, the Fed considers a number of data points.

The Commerce Department’s personal consumption expenditures price index is one particular point of interest. With food and energy discounted, or “core” inflation, which is thought to be a better indicator of long-term trends, the headline reading showed that inflation increased by 5% over the previous year in December.

However, the Fed has recently narrowed its focus even further, concentrating on core services inflation minus housing, which Powell said remains high.

“We need to be patient,” he said. “We think we’re going to need to keep rates at a restrictive level for a period of time before that comes down.”

In his post-meeting news conference last Wednesday, Powell made his first mention of “disinflationary” trends. Markets seized on the phrase and experienced a brief rally before becoming erratic over the past few sessions.

Powell stated that he anticipates a slowing of inflation.

“Our message [at the last meeting] was this process is likely to take quite a bit of time. It’s not going to be smooth,” he said. “It’s probably going to be bumpy, and we think that we’re going to need to do further rate increases, as we said, and we think that we will need to hold policy at a restrictive level for a period of time.”

(Adapted from TheWest.com.au)

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